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Education Dept. to Review Bankruptcy Standards

The Trump administration this week signaled interest in reevaluating rules that determine whether student loan debt can be discharged in bankruptcy, The Chronicle of Higher Education reported. The U.S. Education Department published a request for information in the Federal Register on Tuesday seeking input on the factors the agency uses to determine whether borrowers have met the high "undue hardship" standard.

Prior to 1998, federal law allowed student loan borrowers to have their federal loans discharged if they declared bankruptcy after the seventh year of repayment. Legislation enacted that year removed that provision, barring most borrowers from the forgiveness option unless they could demonstrate that they would suffer "undue hardship" from being forced to pay the loans. Neither Congress nor the U.S. Education Department has defined "undue hardship." Instead, courts have set legal standards for what qualifies, resulting in uneven interpretations, the Chronicle reported. Consumer advocates argue that the three-part test most bankruptcy judges use to determine hardship is too strict, leading the vast majority of borrowers to be denied relief of their student loans.

The issue could potentially emerge as an area of rare bipartisan agreement between Education Secretary Betsy DeVos and congressional Democrats, who have long sought to loosen bankruptcy law for student borrowers. However, it is unclear what steps the department might take in revising guidance for its approach to bankruptcy cases.

Agency officials wrote in the notice that they want to ensure that they "appropriately" carry out the congressional requirements for bankruptcy "while also ensuring that borrowers for whom repayment of their student loans would be an undue hardship are not inadvertently discouraged from filing an adversary proceeding in their bankruptcy case." According to the notice, the department plans to accept public feedback on the issue for the next 90 days.